Potemkin America

As wages stagnate and unemployment booms, U.S. prosperity appears as illusory as that of the old Soviet Union.

By Paul Craig Roberts

In 1961 I was a member of the student exchange program to the Soviet Union. It was the second year of the exchange and part of a diplomatic effort to achieve some thaw in the Cold War.

There were three groups of us totaling approximately 35 American students. The Soviet authorities were not comfortable with us hanging out with Russian students, so we were kept constantly on the move. Consequently, we saw a lot of the communist country and its empire.

My group went in through Yugoslavia and Romania, spent time in Moscow, Leningrad, Kiev, Tashkent, Samarkand, and a Soviet sports camp on the Black Sea in Georgia, and came out via Poland and East Germany during the construction of the Berlin Wall. We were in the Caucasus mountains when Yuri Gagarin made the first spaceflight, a propaganda success for the Soviet Union.

What was most striking about the Soviet Union was that, except for the sparkling clean Moscow subway with its gleaming marble floors and walls and some beautiful old buildings built by the czars, there was nothing there. There was no traffic on Moscow’s boulevards. The small food stores were empty. The department store, GUM, had nothing to sell us for our fistfuls of rubles we had been paid for our Levi jeans, button-down shirts, and penny loafers, clothes literally bought off our backs on the streets.

I remember being on a bus in Tashkent when a meat delivery truck appeared. The carcass was hanging on a rail in the open air. The few vehicles on the street were following the delivery truck. The bus driver deviated from his route to follow the delivery.

Bus passengers came alive with anti-cipation. People began coming out from shops and office buildings. By the time the truck arrived at the small butcher’s shop, a long line had formed.

In the Soviet Union people kept a sharp eye out for deliveries of any kind. People would line up to purchase whatever was available as it could be bartered to obtain other goods. As goods of all kinds were scarce, money was not an effective medium of exchange.

My time with the Soviets made me immune to the exaggerated claims made for Soviet economic performance. During my years in graduate school, it was taken for granted that central economic planning enabled the Soviet economy to continuously generate growth rates that were very high compared to those of market economies. In 1962, G. Warren Nutter’s study, Growth of Industrial Production in the Soviet Union, was published by Princeton University Press for the National Bureau of Economic Research. Nutter concluded that the official index of Soviet industrial output exaggerated Soviet growth, and that Soviet growth was not remarkable compared to that of the United States in similar stages of development. Nutter’s conclusions provoked much controversy, and he had few defenders at the time.

Even as late as the 1980s, the view still prevailed in the CIA that the Soviet Union could triumph in an arms race because central control over investment meant that the Soviets could cause their economy to grow at whatever rate it took to counter an American arms buildup. When the Soviet economy collapsed, the CIA arranged for me to explain to the agency’s analysts why they had been mistaken about their enemy’s capabilities.

The Soviet economy failed because it used more valuable inputs to produce less valuable outputs. The outputs would be measured as statistical product, but the values of the outputs were less than the values of the inputs. In other words, instead of producing value, the Soviet system was destroying value.

This was the result of ideological aversion to using prices and profits to allocate resources and investments. Instead of profit serving as a manager’s success indicator, managers were judged according to whether they fulfilled a plan measured in gross physical output, such as weight, number, square meters.

For example, the success indicator for the construction industry was the number of projects under construction. Consequently, Moscow was littered with unfinished projects because all activity was concentrated in starting new ones. The plan produced a housing shortage because the incentive was to start new constructions not to complete ones already underway.

If a shoe factory’s gross output indicator was a specified number of pairs of shoes, there would be plenty of baby shoes, but none for large feet, because the same amount of material could be used to produce one large pair or several small pairs.

If nails were specified in number, there would be small nails but no large ones. If specified in terms of weight, there would be assortments weighted heavily with large sizes. A famous Soviet cartoon shows the manager of a nail factory being awarded Hero of the Soviet Union for over-fulfilling his quota. In the factory yard are two giant cranes holding one giant nail.

If light fixtures were specified in number, they would be small. If in weight, they would be heavy. Nikita Khrushchev complained of chandeliers so heavy that “they pull the ceilings down on our heads.”

An abundance of natural resources with low extraction costs and the minimal allocation of resources to consumer needs permitted the Soviet economy to continue despite its enormous waste of resources in terms of consumer satisfaction and economic efficiency. But it couldn’t go on forever.

In contrast, the U.S. economy during the 1960s was efficient. Prices and profits were the signals that allocated resources and investments. As the goods and services produced by American firms for American consumers were made by American labor, the profits made by corporations were indications that the economy was serving consumer welfare. American real wages and living standards were rising with the productivity of the economy.

During the 1970s, worsening trade-offs developed between inflation and employment, raising the specter of stagflation. However, this proved to be a problem with economic policy, not a problem inherent in the capitalist economy. Keynesian macroeconomic policy had stimulated demand with easy money but restricted the response of output with high tax rates. Supply-side economists corrected this problem by reversing the policy mix: tighter monetary policy and lower tax rates. Consequently, the U.S. economy resumed economic growth without having to pay for it with rising inflation.

Ironically, when the Soviet Union collapsed in 1991, the consequence was to initiate ruin within the U.S. economy. “The end of history” caused Chinese communists and Indian socialists to join the winning side and to open their economies to First World capital. For the first time, American corporations had access to massive supplies of unemployed low-wage labor. The huge excess supply of labor in India and China meant that workers could be hired at wages far below their productivity, and the difference would flow in profits to executives, shareholders, and Wall Street.

The offshoring of American manufacturing separated Americans’ incomes from the production of the goods and services that they consumed. The advent of the high speed Internet made it possible to offshore professional service jobs, such as software engineering, which drove down the returns to a college education and the employment prospects of graduates. In an offshored economy, the profits of corporations are not a measure of the economic welfare of the population.

As American incomes stagnated—except for the rich, there has been no real increase in 20 years—the economy was kept going by the growth of consumer debt to take the place of the missing growth in take-home pay. Federal Reserve Chairman Alan Greenspan’s low-interest-rate policy fueled a real estate boom and drove home prices to new highs, permitting Americans to refinance their mortgages and to spend the equity. Anyone could obtain credit cards, and many Americans maxed out several.

By the 21st century, the U.S. economy was a Potemkin economy just as the Soviet economy had been. Rising consumer indebtedness had taken the place of income growth and had reached unsustainable levels just as the greed of the unregulated financial sector leveraged debt to irresponsible levels and caused a financial crisis that still threatens the Western world.

Traditional economic policy—low interest rates and large budget deficits—cannot put Americans back to work when the jobs have been sent overseas. The low interest rates deprive retirees and those living on their savings of interest income, thus further suppressing consumer demand. The massive deficits drive down the dollar’s value and threaten its role as world reserve currency. As the U.S. is an import-dependent country, a weaker dollar further suppresses consumer purchasing power.

In addition, the bailouts of the banks and the monetization of the federal deficit by the Federal Reserve, known as quantitative easing, suppress consumer incomes while threatening consumers with inflation and reductions in benefits, such as Social Security and Medicare, and cuts in income-support programs.

The Potemkin American economy pretends that it can afford trillion-dollar wars, trillion-dollar military budgets, and trillion-dollar bailouts despite having sent much of its tax base offshore and undermining the dollar and creditworthiness of the U.S. Treasury.

Amidst high and intractable unemployment, President Obama’s Deficit Commission finds the solution in squeezing the American people harder so that the rich are not deterred by taxes from monopolizing every dollar of wealth growth. Social Security recipients have been selected to pay for the wars and the bailouts by having the retirement age raised and benefits reduced. To spread the misery, commissioner Alice Rivlin wants a 6.5 percent national sales tax, which, if enacted, would further reduce consumer spending during the worst downturn since the Great Depression.

In the USSR, a defunct ideology prevented the Soviets from saving themselves by using price and profit signals, instead of gross output indicators, to organize their economy. In the United States, politically powerful interest groups, such as Wall Street and the military-industrial complex that President Eisenhower warned us about, prevent the measures that would rejuvenate the consumer economy by bringing the offshored jobs home and reduce the deficit by ending the counter-productive wars.

The advantage to corporations and the financial sector of cheap foreign labor can be offset by taxing corporations according to where value is added to their product: a low tax rate if value is added with American labor and a high tax rate if value is added with foreign labor. This simple change would bring jobs back to Americans, rebuild the ladders of upward mobility that made the U.S. an opportunity society, restore the tax bases of cities, states, and the federal government, and reduce the trade deficit by the amount of the goods and services that are produced offshore by U.S. firms for U.S. markets.

Yet just as the Soviet communist bosses held on to power to the point of their self-destruction, the American oligarchies will squeeze the U.S. economy to its death. Is President Obama’s failure to bring any change yet another indication that change in America will only follow catastrophe?

Paul Craig Roberts was assistant secretary of the Treasury under President Reagan. He is the author of Supply-Side Revolution: An Insider’s Account of Policymaking in Washington and Alienation and the Soviet Economy, among other works.

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35 Responses to Potemkin America

My sincere thanks goes to Mr Roberts for unearthing the facts and getting past the puerile media hype about massive ‘prosperity’ in the U.S.over 20 years. We have become a nation with an opulent and insulated upper class and a struggling middle/working class– with a declining standard of living. Millions are terrified about facing ruin by losing their homes or jobs. A Banana Republic is the term we used to call such nations! Nonetheless, we have a resilient and resourceful country and population and we have the potential to take the lead role in the technologies and industries of the future. A leadership with moral virtue needs to imerge that will shift our focus to rebuilding the middle class.

Thank you for that great analysis – and especially the soviet comparison. We westerners seem sometimes so drunk with having won the cold war that we fail to see the inefficiencies of our own system – many of which result from similar causes as the wrong incentives bolshevism created.

A fine article but I would have preferred more on travel and easy on the economics. Tashkent and Samarkand, the two grandest cities along the legendary silk road. In 1961 if you please, a time when the most adventurous thrill-seeking tourist considered Venice to be the apogee of exotic destinations. Come on man, tell us more!

Dr. Roberts gets it about half right. He is absolutely correct (for an economist) about the consequences of “offshoring” production. But his solution of a variable value-added tax on imports falls way short of the mark.

Truth is that we’ve lost or forgotten key technologies with the demise of the last US manufacturer. Implementing Dr. Roberts’ tax scheme will not bring back our passenger rail car manufacturers, our microscope manufacturers, our television set or television camera manufacturers, our stitching machine manufacturers, our “sole leather” manufacturers, etc., etc.

What we need is an industrial policy to restart those industries that we’ve lost and to make sure that the industries that we still have remain competitive. I’m not talking Soviet-style central planning, whose failures are explained in Dr. Roberts’ article, but rather a repository for technological expertise in high tech, medium tech and low tech fields with a mandate to supply this expertise to American companies and entrepreneurs. And we also need selective tariffs or quotas to protect our industries from cheap foreign labor both grunt and professional. If this interferes with the globalist agenda, all well and good.

Thank you Dr. Roberts for this article. I have been following your articles for years now, and only hope that some of them will catch the eyes in the current administration. If this country keeps on going in the same direction, we are doomed. Import taxes must be levied on all products coming from other nations. It is the only way to save America. Hell, they do it to us! We need to wake up and buy American… or bye bye America!

The destruction of the American middle class has been planned for decades by the various elites behind the scenes. Lenin said that the way to destroy the bourgeois(middle class) was to “grind them between taxes and inflation.” This is exactly what has happened over the last 50 years or so. What the elites want is a 3 class society. The elites ,the elites underlings and everyone else. Once the American people give up their individual economic independence and become dependent on the state,then the American people become nothing but contented serfs. By applying Cultural Marxism to the American society through public education, elite controlled main stream media, academia and popular entertainment the American people,by and large, have become a nation of Homer Simpsons. The mantra has been: don’t think for yourself,don’t be independent,don’t be self reliant,vote in elections where the elites pick the candidates,pay your taxes,sign up your kids for the draft and don’t question authority. The goals of the elites is to fold the United States into a one world socialist government run out of the United Nations with the elite behind the curtain pulling the strings. In other words a New World Odor.

“Amidst high and intractable unemployment, President Obama’s Deficit Commission finds the solution in squeezing the American people harder so that the rich are not deterred by taxes from monopolizing every dollar of wealth growth.”

It seems more than the Tunisians and Egyptians need to oust their ruling class.

1. No cuts in Social Security or Medicare and especially no cuts in VA benefits for our veterans. Maybe these programs need to be cut but in the meantime too many Americans depend on these programs to cut them and win. The Democrats know this all too well.

2. A mild social Conservatism. Not too Protestant but not too Catholic. Not too puritan but not too libertine. Basically preserving the Christian heritage and culture of the nation while preserving the right of every American to freedom to worship (or not worship) in any manner that they please.

3. Economic Nationalism. Tariffs or a VAT (value added tax) to protect American industry and encourage manufacturers to return to American soil to make their products. A constitutional amendment to ban any and all free trade agreements and to pull our nation out of the WTO and any other international trade organization. A return to bi-lateral fair trade agreements.

4. End to the Wars in Iraq and Afghanistan. An end to all alliances throughout the world. Close the 134 US bases around the world and bring the troops home.

5. Drill for oil, natural gas and coal on US soil. We have a huge resource rich land mass. It’s time to use it and tell the Saudis “goodbye”.

6. Moratorium on Immigration. A five year moratorium on all immigration except for extreme cases when a US citizen’s foreign family is in danger. Use the military to patrol our southern border. I have much empathy for the Mexicans who come here to work but we must put American workers first and Mexicans need to take care of the problems in their own country.

7. Using the Anti-Trust Laws to break up the corporate monopolies that have a stranglehold over several sectors of our economy.

8. A return to the gold standard. Ending the Federal Reserve. Bringing back real value to the American dollar. A constitutional amendment to reinstitute and preserve the gold standard.

9. Protecting the right of workers to collective bargaining as long as those demands still allow for the company or corporation to make a profit.There is dignity in labor and a long tradition of trade guilds in Western civilization. Capitalism is fine with me as long as their is room for the worker to prosper as well. We were once serfs…we don’t really wish to go back to that.

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This is just a rough draft. It needs to be fine tuned.

Thank you. It is refreshing to read a conservative economist who thinks all but the top income brackets are getting screwed versus some anti-tax, class warfare screed. It’s heartening to read analysis and not cant. At last, a conservative who thinks letting the top 5-10% walk off with everything does not make for a healthy economy
Much like the latter part of the 19th century, too much of our economy is being run by financiers. Unlike industrialists, financiers aren’t really interested in managing companies. Their only interest is how many people can be fired to cut costs, then load the company with debt so that they can suck dollars out and then hopefully sell to the next financier (or even their desperate employees) before the whole thing collapses. No real thought to investing to keep a company viable.
I’m in favor of higher taxes for the rich to both bring down the deficit that their tax cuts have added to , to pay back to Social Security funds that were borrowed to mask the deficit, and to invest in our infrastructure. Impoverishing the many to benefit the few does not make for a good national economy.

“The Soviet economy failed because it used more valuable inputs to produce less valuable outputs. The outputs would be measured as statistical product, but the values of the outputs were less than the values of the inputs. In other words, instead of producing value, the Soviet system was destroying value”.

Exactly. An analogy for the US might be the production of hardware, other goods and services for the military. Or the staggering cost of projecting military power worldwide.

These are outputs that does represent value, in military security and influence worldwide, and jobs and industry at home. Still, the sums invested are extreme, the net result for the economy is negative, and it diverts the attention of a nation from more productive work.

Majumder wrote: “Muslim Brotherhood in Egypt and Hizb Allah in Lebanon will squeeze Israel in between, which means the good old USA will be entangled with unnecessary and unpredictable wars in the middle of nowhere.”

Wow. Who knew IDF hasbara had been outsourced from Tel Aviv to Bombay along with everything else?

Sorry, Majumder, empires are too expensive. It’s time to end the empire.

If India wants to try her hand at ruling the world, America needs to stand out of the way and let India shoot herself in the foot.

During the Reagan years, America went from being the largest creditor nation to being the largest debtor nation. Paul Roberts doesn’t seem to realize he was a big part of what we have now.

Real Keynsianism is this: balanced budgets (or small surpluses) during good times, deficit spending only during downturns. Keysianism is not all deficits all the time, which of course, doesn’t work. When was the last time we had balanced budgets and surpluses?

As far as the labor policies presented here, try getting them past the Chamber of Commerce or the Americant Enterpris Institute.

What Mr. Roberts presents is the worst of Republican macro economic policy with the worst of the Democratic labor policy.

What is the solution then? Stability and time. Big policy changes won’t help. Markets need to clear, people need to pay down their debts, and savings need to go up, and it’s all going to take time.

Excellent article and comments. As I’ve mentioned before, Warren Buffett’s import certificate program is an excellent idea. It doesn’t play favorites as to what industries it protects and all revenue generated by import tariffs goes to subsidize American exporters (alternately, it could be designed so revenue flows to SS trust fund while payroll taxes are cut).http://en.wikipedia.org/wiki/Import_Certificates

The Soviet empire collapsed for three primary reasons. First, the country was run by one political party that was corrupt. Any country regardless of economic system runs a higher risk of failure with a corrupt a system. Second, the western banks cut off funding to the Soviets when they tried to convert to capitalism. Third, the labor unions in Poland supported by the American AFL-CIO told the Soviets to take a hike.

An empire is a country that relies on the labor and resources of other countries. The Soviets lost the ability to stay an empire. People forget the Soviets lost 20 million in WWII.

We’re screwed as a Nation by 2015 The US will seize to exist as a Military power, economic power and Industrial power, WE have SOLD our soul to the DEVIL for thirty pieces of Silver. OUR GOVERNMENT has been LYING to us for DECADES and now people are talking how bad things are getting!!! Hello WAKE up HOLLYWOOD, MAIN MEDIA ,SPORTS, PARTIES all kept us Entertained as we are the most ENTERTAINED NATION ON EARTH but THE LEAST INFORMED..Once we USED to be the WORLDS CREDITOR now SADLY we are the WORLDS DEBTOR, WHEN OUR LEADERS BETRAYED US WITH NAFTA no one listened! I always remember January 1, 1994 The day the agreement came into force as a day of INFAMY. Its not that easy to get your Manufacturing once it goes OFFSHORE the factories and buildings manufacturing equipments and TOOLS are RUSTED!! Its going to take a very long time get our manufacturing going perhaps DECADE or maybe even longer. But then talk is cheap, How can we rebuild, with WHAT????? @ 202 TRILLION DOLLARS NATIONAL DEBT, talk is cheap the MORE QE’s we print the more DEEPER in the HOLE we GO!, GOD PLEASE BLESS THIS HERE UNITED STATES OF AMERICA!

All EMPIRES RISE,PEAK & CRASH, The X- SOVIET UNION DIED FROM EXPANSION & EMPIRE BUILDING, I’m afraid the US will meet the same fate with 1000 BASES around the GLOBE and many ACTIVE wars and more on the horizon I believe we’ll meet the same FATE as the X- SOVIET UNION & the Roman empire!

Simplicity is said to be genius. Same with truly free markets. Supply side is still a controlled market, basically the less laws the freer the market. Economies of scale breakdown when beauracracies develop as always the case in ever growing companies. A strong economy is made of small business. When the USA was mostly made of farmers were were strongest, case in point look at GM, Government Motors has been bailed out by the Government rewarding failure which ends in more corruption and less jobs, kinda like that Russian economy of the 60′s

The author’s conclusion could be helpful, if two things happen:
First, the waste in local, state and federal budgets stops growing.
Second, the collected additional taxes are directed not to the US budget for farther consumption, but ONLY to decreasing the trade deficit.
Increasing baseless research-social-educational budget expenditures will make us USSR 2.0, for sure.

US will not disappear, just go over a major crisis. Not big deal comparing to troubles that Russia experienced say in 1612, 1917, 1941 or 1990. People in US carry knowledge, energy and ethics aquired from previous periods of development. All this are real national treasures.

Unfortunately, politicians and populace alike seem largely in a state of shocked (albeit necessarily temporary) denial.

On the one hand, they seem fully sold on the notion that more power to the very same plutocrats will somehow now magically produce a cure. And, on the other hand, nary a word about pruning back the barren militarism whose decades-long astronomical tax burden has largely paved the road to the present economic hell.

You can not compare the situation in the USSR and the USA in 1960. It took only 14 years after the Second World War. The Soviet Union made the brunt of this war on his shoulders. Only the human toll amounted to 26 million, imagine how many there were persons with disabilities who needed social services, and how many hands does not receive the country’s economy.
Was occupied by a large part of European territory, which was industrial-economic base (2 / 3 of existing capacity). The remaining companies have been adapted for the production of military goods. Hence the strong military-industrial complex in the USSR, and the backwardness of civilian industries.
If you want to compare the efficiency of the economy – it is best to do this for Germany … Only Germany has suffered an equally large losses in this war as the Soviet Union. And here in 1960. comparison would not be in favor of Germany …

And the rest of paper is true. Soviet economic system needs reform.
Like everything else in the world. Ever any the most efficient system becoming obsolete. And the winner is the one who can reform it in time. The Soviet leadership to the reforms came too late …

U.S., all these 50 years, moved by the potential that they have provided favorable market and political conditions of post-war period. Who skillfully used the Roosevelt. Today, this potential has been exhausted.
We need new reforms, new leaders … Is there any in the United States a man like Roosevelt? I doubt it …

What was America to Roosevelt, and what she was after him?
Roosevelt received the starving country whose financial system was paralyzed, the industry stopped prestige in the international arena was zero. A superpower left … Of course, what were the cause of a favorable geopolitical conditions … But this, too, had to be able to use … I am more than convinced that neither Truman nor any subsequent U.S. presidents would never do that could not … Just because they were ideologically fixated to “the great American role fighter for democracy.” This is exactly what the suffering and all the Soviet leaders, only with the Communist bias … Roosevelt was also a pragmatist and slogger – he talked about democracy and other tinsel, and did it … And he got it … Besides, the humanism of He had everything in order – if he lived until August of 1945, there would be no tragedies of Hiroshima and Nagasaki … That maniac who, in my opinion, it’s Truman …

Excellent article. I don’t think we need to assess a higher tax on US companies for their products produced with foreign labor though. The disparity between the US labor cost and the Chinese labor cost, for example, is either caused by the US standard being too high, which could be diminished by eliminating the minimum wage, or the foreign standard being too low, which is more complicated to remedy. If the US had any of its previous cache, we could pressure foreign governments to improve the working conditions of their citizens. Our status is lessened of late, so we could levy a foreign labor import tax on them. I would prefer to see the minimum wage abolished, so we could let the markets correct themselves here in the US. Or maybe a combination of both.

PoorRichard2
Hence we should start to introduce “planned economy”?
Only under socialism, the value of wages adjust from above …
A repeal of the minimum wage will give nothing, except to reduce the budget revenue shortfall in the amount of penalties calculated on the minimum wage

More substantive …
Almost all articles by American authors I have created a sense of ambivalence. As they would say in Russia: “They are beginning for the health and end up for the peace.”
Like all true noticed, and rightly … A conclusion is absolutely opposed to all the above … and the reason for this – the big American set – Leadership …

In this article – this author’s remark about the flight of the first man in space, as a “propaganda stunt” … recently seen a similar statement by the American author of the first artificial satellite, which calls it “just flashing a tin” … Lord, drop the false pride and be wise to recognize the significance of these events. Be reasonable admire their creators, and together with the whole world enjoy it.
Not least because it is on these “propaganda stunt” and “flashing cans” now fly the U.S. astronauts on the International Space Station “, created in the image of the Soviet station Mir.

After all, the greatness of foreign affairs is not downplaying the greatness of your …

Konstantin
I agree Yuri Gargarin’s flight into space was far more than a publicity stunt. However Roberts faux pax should not negate the excellent analysis of the USA’s offshored economic doldrums descending rapidly to chaos. I’m on board for his proposed tax system rewarding American produced goods coupled with the re-industrialization restart proposed by Art R.